CMHC revises down home price forecast over next two years to adjust for interest rate spike

Canada’s housing agency has cut its national home price forecast for this year and next, saying that interest rates were rising faster than it anticipated – but the agency is not predicting a sharp correction because it said a housing shortage will support prices.

Canada Mortgage and Housing Corp., which was criticized in 2020 for sticking to a pessimistic outlook for housing prices early in the pandemic, is revising its forecast because the Bank of Canada will likely continue to hike its benchmark interest rate aggressively to slow runaway inflation, which makes it harder for residents to afford a mortgage.

The federal agency revised down the percentage gain it expects from 2021 to 2022, with the average price now forecast to climb 11 per cent instead of 13.7 per cent. The forecast is for the full year and it includes the first quarter when home prices peaked.

The agency also expects the average home price in Canada to decline as much as 5 per cent from the first quarter of this year to the second quarter of next, hitting a low of $742,970, according to a blog on CMHC’s website.

Although home prices have plummeted since the central bank started raising interest rates in March, CMHC chief economist Bob Dugan said he was “leery” of forecasting a steeper price decline when the housing shortage is so severe.

“I have trouble believing in a very big price correction,” Mr. Dugan said. “I don’t want to say that it can’t happen. It is possible for a 10-per-cent price correction like some people are saying. But I’m just leery of that because of the supply shortage,” he said.

Private-sector economists predict the country’s average home price could fall as much as 20 per cent. Toronto-Dominion Bank sees a 19-per-cent drop from the first quarter of this year to the same period in 2023.

Home prices in some of the hottest real estate markets have already declined rapidly from the peak in the first quarter of this year. In the Toronto region, the largest real estate market in the country, the typical home price is down nearly 10 per cent from March to June.

Mr. Dugan said there will be volatility from month to month, and that CMHC was looking at the general trend. Over all, his new forecast now includes the Bank of Canada raising interest rates to 3.5 per cent by next year, whereas in April, CMHC predicted the central bank would raise interest rates to 2.5 per cent. The current rate is 1.5 per cent and many economists expect the bank to add another 75 basis points at its scheduled interest-rate announcement on Wednesday. That would move interest rates up to 2.25 per cent – just shy of CMHC’s April prediction.

Mr. Dugan said CMHC has learned from its mistake in May, 2020, when the agency predicted the average selling price of a home could fall between 9 per cent and 18 per cent in the worst-case scenario. The agency issued the forecast shortly after the government lockdowns had hit sales and prices; yet even after the residential real estate market quickly recovered and home prices accelerated, CMHC stuck to its forecast.

“When we knew that that forecast was wrong, we should have come out sooner,” Mr. Dugan said. “I’m not afraid to admit that. And so you learn from your mistakes, and so that’s what we’re trying to do here.”

CMHC sees the average home price bottoming out in the second quarter of next year and then gradually rebounding over the latter half of 2023 and 2024. It predicts the average home price will fully recover at the end of 2024 and surpass this year’s peak by 2025.

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